DONALD Trump’s stunning victory in the United States presidential election on November 8 was met with shock and a degree of trepidation around the world.
It was a different story in America’s coal country, stretching from Appalachia to Montana and Wyoming. Trump’s repeated vow to end the war on coal during the campaign bought him a lot of votes from coal workers during the election, particularly in the key swing states, with the American Coal Council describing the result as “the first ray of light we have seen in years.”
With production down 20% from 2015 levels last year, and 300 coal-fired power plants closing since 2008, the US coal industry has had a tough time of late. Cheap natural gas has flooded the market prompting some coal fire plants to convert, while renewables have increased their share of total energy generation to 13% from 8.5% in 2008. Energy use is also becoming more efficient. Less electricity is now required to power anything from refrigerators in the home to manufacturing processes, which has further reduced demand.
The result is that thousands of people in the coal industry have lost their jobs, and some once thriving towns and communities have fallen into irreversible decline.
The impact has also been felt by US Class 1 railways, including Burlington North Santa Fe (BNSF), which serves the Powder River Basin in southeast Montana and northwest Wyoming. Speaking before the election result at IRJ sister publication, Railway Age’s, Energy by Rail Conference on October 27, BNSF Railway executive chairman Mr Matt Rose said that from around 20% of units and 25% of revenues at its peak, in the long-term he feels coal will account for 10% of the railway’s volumes. In 2015 BNSF carried 2.3 million tonnes of coal, which equated to 22% of its total volumes, and 19% of total revenue, and was up 1% on 2014. However, fourth quarter volumes were down 8% year-on-year, a trend that continued in 2016, with total volumes in the first nine months down 26%.
While Trump’s policies could delay this decline - the president-elect has heavily criticised the Clean Power Plan, an Obama administration policy which proposes to cut emissions from new and existing coal power plants by 32%, and is currently being challenged in the Supreme Court - the market will dictate US energy policy. Indeed, if gas remains cheap, it will be difficult to justify mining more coal for domestic consumption.
Yet Rose does not believe that coal is doomed. On the contrary, as an abundant resource that is low cost at $US 12-15 per tonne and which is served by an efficient transport network, he feels that the United States coal industry should now look beyond its borders for future customers for Power River Basin coal.
“As developing countries develop, what are they going to need? Affordable reliable energy. And what is that going to be? It’s going to be coal,” Rose says. “The world should expect that more and more coal is going to be mined. The coal in this country is much cleaner coal than what is being mined in Indonesia, what is being mined in China. So we have this debate of whether we are much better off exporting and allowing developing countries to burn our coal? But that has yet to gain universal acceptance.”
Trump’s contempt for the Paris Agreement on climate change could translate into increased coal exports if the US ignores the agreement’s pledge to help developing countries fund low-carbon sources of energy.
Another Trump policy that could have a profound impact on the rail freight industry is his commitment to rebuild America’s infrastructure. The specifics of this policy are unclear at this stage, including the level of support for rail or public transit (p18) but there is a strong chance that the expected use of public-private partnerships (PPPs) will spawn rail capacity expansion.
Since the election, the Association of American Railroads (AAR) has encouraged Trump’s transition team, including vice-president Mr Mike Pence, to recognise the importance of railway infrastructure as it formulates its plan. The AAR also recommended several policies to the incoming administration, including the introduction of a sustainable, user-pay infrastructure funding system.
The AAR, and Rose, advocate such a move in order to create a more level playing field between road and rail. Since 2008, the federal government has provided $US 143bn in general budget funds to the Highway Trust Fund to make up for the shortfall in petrol tax revenues. Rose argues that this policy has in effect subsidised rail’s competitors by enabling them to avoid paying their fair share to maintain infrastructure, which in turn is incentivising the adoption of longer, heavier, and even automated trucks.
He told the conference that while his railway receives very little federal funding - less than 1% in its current funding model - the government does have the ability to impact the railway’s profitability and its ability to compete through regulations from the Surface Transportation Board (STB) and the Environmental Protection Agency (EPA).
“If the country wants more tonnes to go to the railroad, we need to enact pro- tax, pro-regulatory initiatives that incentivise that,” Rose says. “If we want more tonnes to go to the highway we need to do just the opposite.”
Similarly, Rose says problems with securing necessary permits for projects are also hindering US railways’ ability to deliver low carbon alternative transport infrastructure. He says that this has become a process by which opposition groups stop certain projects from moving forward as they get bogged down in lengthy court cases.
“We have been tussling with a project down in Los Angeles, what we call a near-dock project, that would take millions of truck miles off the Interstate 710 highway, and reduce carbon emissions and congestion,” Rose says. “It’s a no-brainer. However, it got caught up in local permitting issues. It was nine years before we got a draft Department of Environmental Regulation (DER) permit. But then the next day we had nine different groups, including the City of Long Beach, sue us. We are into it now for $US 60m, year 10 and we have got a lawsuit on our hands.”
As a possible solution to these problems, he referred to Canada’s “shot clock” limit on the permit process, which has helped to speed up approvals, and the capability of state administrations during times of crisis to expedite these processes to get projects approved and completed.
While it is unsurprising that efforts to boost rail’s competitive position against road are encouraged by the Class 1s, recent proposals by the STB to revise some regulations governing the industry, most notably the anticompetitive conduct requirements, have been met with strong opposition.
On July 27 2016, the STB proposed new regulations to improve the availability of “reciprocal switching,” the process by which the incumbent railway, for a fee, must handle the cars of a competing carrier, enabling the other carrier, which cannot physically serve the facility, to compete with the incumbent’s single-line service. The proposal follows other STB recent reregulation reviews which recommended reversing pervasive competition for certain commodities and capping the rates that railways can charge.
The STB is acting to appease disgruntled shippers that have complained for decades at the lack of available market forces which could potentially drive down the cost of transporting their goods, and cites the railway’s recent strong performance to justify revising the regulations.
However, the industry argues that introducing cost-based mandated access rates will deter investment and threaten the viability of the rail freight industry. Rose describes the 12 proposed proceedings, which he says would impact every portion of the regulatory doctrine governing the industry, as potentially dealing a devastating blow to the railway and could spell a return to the investment levels of 2000-2001
Rose voiced strong support for the regulatory environment that the Class 1s are operating in currently, applauding the work in the years since partial deregulation in 1980 for turning what was a bankrupt and insolvent network into the world’s best freight railway, generally without using government funds.
The US freight industry has invested $US 600bn of private capital into the network since partial deregulation, including an average of $US 26bn in each of the last five years. Rose says that BNSF alone has invested $US 55bn since he entered the company’s leadership structure in 2000, and given this investment, he argues that the railway’s returns are very reasonable, and he feels that the majority of the railway community would agree.
Rose indicated that he is not opposed to regulatory reform, particularly that which reduces the length of the litigation process, but would always oppose measures that will ultimately deter investment. He also feels that in proposing the changes, the STB has overlooked the current condition of the industry, where peak returns are down.
“We have a good regulator, they are very capable people, but they are going to have to understand that you cannot look in the rear-view mirror, you’ve got to look at the current day and an industry that has got 3000 locomotives in storage, an industry that has got 50,000 freight wagons in storage, and an industry that has got 6000-7000 employees furloughed,” Rose says.
“It is a business cycle that none of us like, but it is the reality. It is the reality of what has happened with the commodities super cycle. It is the reality of what is going on with demographics in this country. Wherever this thing levels out, the industry is going to be in much better shape, except for any significant change to the regulatory agency, because we are in much better shape than the 2007 recession, the 1999 recession and the 1990 recession.”
In particular Rose points to the railway’s recent safety record as reflecting the value of this capacity to invest, and the strength of the industry in general. For example, he says that since BNSF hauled its first crude oil train on December 31 1999, it has carried 1.4 million units of crude oil, and in that time, it has reported only 38 failures, with 99.9997% of its services incident-free.
He adds that having the continued capability to invest in new technology, including Positive Train Control (PTC), will underpin this position. Indeed, he says that the next step in the PTC evolution is moving block, while the railway is already implementing driver assist systems intended to improve safety and eliminate human risk. Ultimately this could lead to the development of driverless technologies, and with the US Department of Transportation already allocating $US 5bn to support the development of autonomous driving technologies for roads, he says it’s an area in which the rail sector must keep up.
“The railway industry has got to continue to reinvent itself and look at those things,” Rose says. “Anything that gets in the way of that just gets more trucks on the highway which I don’t think anyone wants to do.”
However, harnessing the skills within its workforce to continue to push these boundaries, while effectively managing everyday operations, remains a major challenge to BNSF and railways across the United States.
A significant proportion of the railway’s staff, many of whom are career railwaymen with 30-40 years’ service, are now retiring or reaching retirement age. Rose says that BNSF has hired “enormous amounts of people” over the last 15 years, but he admits that the railway is still not at the point where it has enough talent to replace those leaving the industry.
Yet Rose is confident that BNSF will adapt and cope. He says his experience of the new people working for the company, and the exposure they are getting to all facets of the railway’s operation, counters these concerns. In fact, it provides him with reason to be very optimistic about the future of the company, and the industry in general.
“The talent is going to be so much more educated and technology-savvy than the people who came into the railway and are now my age,” he says. “It is an incredibly exciting time to be in the industry.”